<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                            ------------------------

                                  FORM 10-QSB

(MARK ONE)

<TABLE>
<C>        <S>
   /X/     Quarterly Report pursuant to Section 13 or 15(d) of the
           Securities Exchange Act of 1934 for the quarterly period
           ended September 30, 1999
</TABLE>

                                       or

<TABLE>
<C>        <S>
   / /     Transition Report pursuant to Section 13 or 15(d) of the
           Securities Exchange Act of 1934 for the transition period
           from to
</TABLE>

                         Commission file number 1-14697

                            ------------------------

                                AUDIOHIGHWAY.COM

       (Exact Name of small business issuer as Specified in its Charter)

<TABLE>
<S>                                            <C>
                 California                                     77-0377306
       (State or other jurisdiction of                         (IRS Employer
       incorporation or organization)                       Identification No.)

    20300 Stevens Creek Blvd., Suite 100                           95014
                Cupertino, CA                                   (Zip Code)
  (Address of principal executive offices)
</TABLE>

                                 (408) 861-4000
              (Registrant's telephone number, including area code)

                            ------------------------

    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/  No / /

    Indicate the number of shares outstanding of each of the issuer's classes of
common stock of the latest practicable date.

<TABLE>
<CAPTION>
                               OUTSTANDING AT
          CLASS              SEPTEMBER 30, 1999
          -----              ------------------
<S>                          <C>
Common Stock, no par value        5,693,984
</TABLE>
<PAGE>
Part I--Financial Information

Item 1: Financial Statements

                                AUDIOHIGHWAY.COM

                            CONDENSED BALANCE SHEETS

                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,   DECEMBER 31,
                           ASSETS                                 1999            1998
------------------------------------------------------------  -------------   ------------
                                                               (UNAUDITED)
<S>                                                           <C>             <C>
Current assets:
Cash and cash equivalents...................................    $ 16,747        $ 13,007
  Accounts receivable.......................................         548              80
  Other assets..............................................         879              47
                                                                --------        --------
    Total current assets....................................      18,174          13,134
Property and equipment, net.................................         730             333
Other assets, net...........................................         625               0
                                                                --------        --------
                                                                $ 19,529        $ 13,467
                                                                ========        ========
</TABLE>

<TABLE>
<CAPTION>
            LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------------------------------
<S>                                                           <C>          <C>
Current liabilities:
  Current maturities of long term debt......................   $    592     $    952
  Accounts payable..........................................        721        1,128
  Accrued expenses and other current liabilities............        438          204
                                                               --------     --------
    Total current liabilities...............................      1,751        2,284
Long term debt..............................................          0          376
Stockholders' equity
  Preferred Stock, no par value; 5,000,000 shares
    authorized;
    none outstanding........................................          0            0
  Common Stock, no par value; 50,000,000 shares authorized;
    5,693,984 outstanding...................................     32,915       19,130
  Additional paid-in capital................................      4,194        4,194
  Accumulated deficit.......................................    (19,331)     (12,517)
                                                               --------     --------
    Total stockholders' equity..............................     17,778       10,807
                                                               --------     --------
                                                               $ 19,529     $ 13,467
                                                               ========     ========
</TABLE>

                  See notes to Condensed Financial Statements

                                       2
<PAGE>
                                AUDIOHIGHWAY.COM

                       CONDENSED STATEMENT OF OPERATIONS

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                        NINE MONTHS            THREE MONTHS
                                                           ENDED                   ENDED
                                                       SEPTEMBER 30,           SEPTEMBER 30,
                                                   ---------------------   ---------------------
                                                     1999        1998        1999        1998
                                                   ---------   ---------   ---------   ---------
                                                        (UNAUDITED)             (UNAUDITED)
<S>                                                <C>         <C>         <C>         <C>
Net revenues.....................................   $ 1,027     $    87     $   613     $    77
Costs and expenses:
  Operating and development......................     2,780         796       1,336         564
  Sales and marketing............................     3,635       1,040       1,684         774
  General and administrative.....................     1,275         491         570         280
                                                    -------     -------     -------     -------
    Total cost and expenses......................     7,690       2,327       3,590       1,618
Loss from operations.............................    (6,663)     (2,240)     (2,977)     (1,541)
Other income (expenses):
  Interest (expense) income, net.................      (149)     (1,095)        146        (828)
  Other..........................................        (2)          0           0           0
                                                    -------     -------     -------     -------
    Net loss.....................................   $(6,814)    $(3,335)    $(2,831)    $(2,369)
                                                    =======     =======     =======     =======
Basic and diluted net loss per share.............   $ (1.30)    $ (3.32)    $ (0.50)    $ (2.37)
Shares used in computing basic and diluted net
  loss per share.................................     5,247       1,006       5,629       1,001
</TABLE>

                  See notes to Condensed Financial Statements

                                       3
<PAGE>
Item 1: Financial Statements (Continued)

                                AUDIOHIGHWAY.COM

                       CONDENSED STATEMENTS OF CASH FLOWS

                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                               NINE MONTHS ENDED
                                                                 SEPTEMBER 30,
                                                              -------------------
                                                                1999       1998
                                                              --------   --------
                                                                  (UNAUDITED)
<S>                                                           <C>        <C>
Net cash used in operating activities.......................  $(9,182)   $(2,111)
                                                              -------    -------

Cash flows from investing activities:
  Acquisition of property and equipment.....................     (528)       (46)
  Acquisition of business...................................     (200)         0
                                                              -------    -------
    Net cash used in investing activities...................     (728)       (46)

Cash flows from financing activities:
  Proceeds from (repayment of) long term debt...............     (135)     2,305
  Proceeds from issuance of common stock....................   13,785         18
                                                              -------    -------
    Net cash provided by financing activities...............   13,650      2,323
                                                              -------    -------
      Net change in cash and cash equivalents...............    3,740        166
Cash and cash equivalents at beginning of period............   13,007          5
                                                              -------    -------
Cash and cash equivalents at end of period..................  $16,747    $   171
                                                              =======    =======
</TABLE>

                  See Notes to Condensed Financial Statements

                                       4
<PAGE>
                                AUDIOHIGHWAY.COM

                    NOTES TO CONDENSED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 1999

NOTE 1 -- THE COMPANY AND BASIS OF PRESENTATION

    audiohighway.com (the "Company") is a global Internet media company that
offers a library of audio content via the World Wide Web (the "Web"). The
accompanying unaudited condensed financial statements reflect all adjustments
that, in the opinion of management, are necessary for a fair presentation of the
results for the periods shown. The results of operations for such periods are
not necessarily indicative of the results expected for a full year or for any
future period. These financial statements should be read in conjunction with the
financial statements and related notes incorporated by reference in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1998.
Certain prior period balances have been reclassified to conform to current
period presentation.

NOTE 2 -- ACQUISITION OF MASS MUSIC

    Effective January 1, 1999, the Company completed the acquisition of
substantially all the assets of Mass Music, Inc., which markets and sells music
products through its Internet site. The acquisition was accounted for as a
purchase in accordance with APB Opinion No. 16. Under the purchase method of
accounting, the purchase price is allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of the
acquisition. Results of operations for Mass Music have been included with those
of the Company for periods subsequent to the date of acquisition. The total
purchase price of the acquisition was $1,000,000, $200,000 in cash and a payable
in the amount of $800,000. In April 1999, the Company converted the payable into
36,478 shares of the Company's Common Stock. The purchase price was allocated to
the assets acquired based on their estimated fair values as follows:

<TABLE>
<S>                                                           <C>
Customer lists..............................................  $  873,516
Software operating systems..................................     102,000
Other.......................................................      24,484
                                                              ----------
                                                              $1,000,000
                                                              ==========
</TABLE>

    Customer lists and other intangible assets will be amortized on a straight
line basis over a period of two years. Amortization expense for the nine months
ended September 30, 1999 was $375,000.

NOTE 3 -- EARNINGS (LOSS) PER SHARE

    Earnings (loss) per share is based on the weighted average number of common
and equivalent shares outstanding during the period. Basic net earnings (loss)
per share is computed by dividing the net earnings (loss) by the number of
weighted average common shares outstanding. Diluted earnings per share reflects
potential dilution from outstanding stock options and warrants using the
treasury stock method and convertible debt using the if-converted method.
Equivalent shares have been excluded from the diluted earnings per share
calculation as the inclusion would be anti-dilutive in loss periods.

NOTE 4 -- EXERCISE OF COMMON STOCK PURCHASE WARRANTS

    During the third quarter of 1999, Common Stock Purchase Warrants issued as
part of the Company's various rounds of debt financing prior to its
December 1998 IPO were exercised. A total of 106,391 warrants were exercised
during the three month period ended September 30, 1999, which resulted in gross
proceeds to the Company of approximately $273,991.

                                       5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS

    The following discussion and analysis provides information that the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition for the quarterly
periods ended September 30, 1999 and 1998. The following discussion should be
read in conjunction with the Financial Statements and Notes thereto appearing
elsewhere in this Report on Form 10-QSB and in conjunction with the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998. Some of the
information in this Report contains forward-looking statements which involve
substantial risks and uncertainties. These statements can be identified by
forward-looking words such as "may," "will," "expect," "anticipate," "believe,"
"estimate" and "continue" or similar words. Investors should read statements
that contain these or similar words carefully because they (1) discuss our
expectations about the Company's future performance; (2) contain projections of
the Company's future operating results or of the Company's future financial
condition; or (3) state other "forward-looking information." The Company
believes it is important to communicate its expectations to its investors. There
may be events in the future, however, that the Company is not accurately able to
predict or over which it has no control. The risk factors discussed in "Business
Risks," later in this Report, as well as any cautionary language in this Report,
provide examples of risks, uncertainties and events that may cause the Company's
actual results to differ materially from the expectations described in the
forward-looking statements. Additional risks will be described from time to time
in the Company's other filings with the SEC. Investors should be aware that the
occurrence of any of the events described in the risk factors and elsewhere in
this Report and in the Company's other periodic SEC filings could have a
material and adverse effect on its business, results of operations and financial
condition.

GENERAL

    The Company is an information and entertainment internet company that has
built one of the largest and most diverse libraries of free audio content for
consumers on the Internet. Consumers visiting the Company's Web site
(www.audiohighway.com) can access thousands of hours of audiobooks, music, news,
entertainment, education and information selections in a number of Internet
audio formats, (including MP3, RealPlayer and Windows Media Player) through a
variety of unique audio channels. In addition, the site is updated throughout
each day with timely news and information feeds. This free audio content can be
streamed via the Internet directly to PCs for immediate listening or downloaded
for future playback through portable digital audio devices. Consumers can also
purchase music and video selections from audiohighway.com's online music store,
Mass Music-TM-, at www.massmusic.com, as well as other technology products
through audioshop-TM- at www.audioshop.audiohighway.com.

    During the period from the Company's inception in June 1994 until
November 1997, the Company had no revenues and its operating activities related
primarily to the research and development efforts and initial planning and
development of the Company's Web site and operations. During 1997, the Company
generated minimal revenues from Web-based advertising, and the Company's
operating activities related to the continued development of its proprietary
software, building market awareness and the launch and continued enhancement of
its Web site. Throughout the Company's existence, it has expended significant
resources in the research and development of its technology and the aggregation
of content by obtaining Internet broadcasting rights to audio programming.

    The Company's revenues are derived principally from electronic commerce
("e-commerce"), the sale of banner advertisements, channel sponsorships, and
audio commercials included in its downloaded or streamed audio programming and
revenue, all on short-term contracts, and revenue sharing opportunities.
Advertising revenues are recognized in the period in which the advertisement is
delivered. The audio selections, which include audio advertisements, are free of
charge to the user. A larger percentage of revenues were attributable to
e-commerce than any other source during the third quarter of 1999.

                                       6
<PAGE>
    During the first quarter of 1999, the Company acquired substantially all of
the assets of Mass Music, Inc., a company engaged in the sale of music CD's and
videos through the Web site located at www.massmusic.com. During the first
quarter, the Company also launched "audioshop," the e-commerce portion of the
audiohighway.com Web site. Nearly all of the Company's e-commerce revenue during
the first nine months of 1999 came from audioshop and sales at
www.massmusic.com.

    In the future, the Company anticipates that it may generate additional
revenue streams through ad-free program charges and charges for premium content.
However, the extent and timing of developing such additional revenue sources is
not currently known, and there is no assurance that the Company will in fact
generate revenues from all or any of these potential sources at any time in the
future.

    The amount of revenue that the Company can generate is directly related to a
number of factors, including the volume of advertisers, the rates charged for
the various types of advertising, the number of users who visit the Company's
Web sites and the amount of audio content downloaded or streamed. To date, the
Company has generated a relatively small amount of advertising revenue. The
Company is using a significant portion of its assets to expand sales and
marketing and thereby expects to rapidly expand its advertising revenues. There
is no assurance, however, that the Company will successfully increase revenues
or achieve profitability.

    The Company has signed agreements with major media companies to provide a
wide selection of audio content such as news, books, self improvement programs,
magazine articles, radio and television programs and movie reviews. The Company
stores audio content on its Web site and is continually adding content to its
audio library. The cost of this content to the Company is, for the most part,
directly proportional to the duration of downloaded content. Certain of the
content is purchased on a flat fee basis.

    The Company has incurred significant losses since its inception. As of
September 30, 1999, the Company had an accumulated deficit of approximately
$19,331,000 and is continuing to operate at a loss. The Company believes that
its success will depend largely on its ability to attract a greater number of
users to its Web sites, expand e-commerce activity, obtain advertising contracts
and secure additional audio content of interest to users. Accordingly, the
Company is investing heavily in sales and marketing, content acquisition and
continued research and development efforts.

    In view of the rapidly evolving nature of the Company's business and its
limited operating history, the Company believes that period-to-period
comparisons of its revenues and operating results, including its gross profit
margin and operating expenses as a percentage of total net revenues, are not
necessarily meaningful and should not be relied upon as indications of future
performance.

PLAN OF OPERATIONS

    The Company is using the net proceeds of its December 1998 IPO to expand and
improve its business. The Company expects its expenditures to increase very
substantially across all expense categories as it seeks to increase e-commerce
and advertising revenues, expand its digital audio content library and upgrade
its Web site. The Company expects the most significant expense increases will
occur in sales and marketing and operating and development.

RESULTS OF OPERATIONS

    NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
     SEPTEMBER 30, 1998

    Net revenues were $1,027,000 for the nine months ended September 30, 1999,
as compared to $87,000 for the same period in 1998. The Company launched its Web
site in November 1997. Revenues generated in 1998 were primarily from
advertising sales. Revenues for the first three quarters of 1999 were attributed
to increased e-commerce sales, including revenues generated by the Company's
Mass Music and Audioshop web sites, as well as advertising sales and revenue
sharing opportunities. The Company expects e-commerce to account for an
increasingly larger percentage of net revenues in the future.

                                       7
<PAGE>
    Operating and development expenses were $2,780,000 for the nine months ended
September 30, 1999, up 249% from $796,000 for the same period in 1998. This
increase was primarily the result of increased payroll expenses associated with
increased staffing, data communications expenses, costs to produce and maintain
the Company's Web sites, use of consulting engineers and amortization of certain
of the assets acquired from Mass Music, Inc. The Company employs outside
consulting engineers to facilitate a portion of its development effort.

    Selling and marketing expenses were $3,635,000 for the nine months ended
September 30, 1999, up 250% from $1,040,000 for the same period in 1998. This
increase is primarily attributable to the increased payroll expenses associated
with additional sales and marketing staff, as well as increased expenses for
public relations, investor relations, and advertising and marketing expenses
associated with promoting the Company's web sites. The Company expects selling
and marketing expenses to continue to increase substantially in future periods
as the Company continues to promote its Web sites.

    General and administrative expenses ("G&A") were $1,275,000 for the nine
months ended September 30, 1999, up 160% compared to G&A expenses of $491,000
for the same period in 1998. This increase was primarily the result of increased
staffing costs, accounting fees, legal fees and expenses.

    The operating loss was $6,663,000 for the nine months ended September 30,
1999 compared to an operating loss for the same period in 1998 of $2,240,000, an
increase of approximately 197%. As noted above, the increased loss was primarily
the result of increased expenditures in the sales and marketing, and operating
and development areas.

    Interest expense decreased approximately 86% to $149,000 during the nine
months ended September 30, 1999 from $1,095,000 in the same period in 1998. This
was primarily the result of retiring a substantial portion of the outstanding
debt on the Company's books following the Company's December 1998 initial public
offering. The net carrying value of outstanding debt at September 30, 1999 was
$592,000 compared to $1,328,000 on December 31, 1998.

    As a result of the factors described above, for the nine months ended
September 30, 1999, the Company incurred a net loss of $6,814,000 compared to a
net loss of $3,335,000 for the same period in 1998.

    The Company has no current tax liability and management has determined that
the realization of its deferred tax assets is not probable. As such, the Company
has provided a full valuation allowance against its deferred tax assets.

RESULTS OF OPERATIONS

    THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
     SEPTEMBER 30, 1998

    Net revenues were $613,000 for the three months ended September 30, 1999
compared to $77,000 for the same period in 1998. The Company launched its Web
site in November 1997. Revenues generated in 1998 were primarily from
advertising sales. Revenues in the third quarter of 1999 were attributed to
increased e-commerce and advertising sales, including revenues generated by the
Mass Music and Audioshop web sites. During the three months ended September 30,
1999, e-commerce accounted for the largest percentage of net revenues.

    Operating and development expenses were $1,336,000 for the three months
ended September 30, 1999, up 136% from $564,000 for the same period in 1998.
This increase was primarily the result of increased payroll expenses associated
with increased staffing, data communications expenses, costs to produce and
maintain the Company's Web sites, use of consulting engineers and amortization
of certain of the assets acquired from Mass Music, Inc. The Company employs
outside consulting engineers to facilitate a portion of its development effort.

                                       8
<PAGE>
    Selling and marketing expenses were $1,684,000 for the three months ended
September 30, 1999, up 118% from $774,000 for the same period in 1998. This
increase is primarily attributable to the increased payroll expenses associated
with additional sales and marketing staff, as well as increased expenses for
public relations, investor relations and advertising. The Company expects
selling and marketing expenses to continue to increase substantially in future
periods as the Company continues to promote its Web sites.

    General and administrative expenses ("G&A") were $570,000 for the three
months ended September 30, 1999, up 104% compared to G&A expenses of $280,000
for the same period in 1998. This increase was primarily the result of increased
costs in accounting fees, legal fees and expenses incurred in connection with
transactions and public company compliance.

    The operating loss was $2,977,000 for the three months ended September 30,
1999 compared to an operating loss for the same period in 1998 of $1,541,000, an
increase of approximately 93%. As noted above, the increased loss was primarily
the result of increased expenditures.

    During the three months ended September 30, 1999, the Company had a net
interest income of $146,000 compared to an interest expense of $828,000 for the
same period in 1998. This was primarily the result of amortizing the fair value
attributed to warrants issued in connection with outstanding debt over the life
of the related debt in 1998, and retiring a substantial portion of that debt in
the first half of 1999. Additionally, interest income was earned on the net IPO
proceeds during 1999. The net carrying value of outstanding debt at
September 30, 1999 was $592,000 compared to $952,000 on September 30, 1998.

    As a result of the factors described above, for the three months ended
September 30, 1999, the Company incurred a net loss of $2,831,000 compared to a
net loss of $2,369,000 for the same period in 1998.

LIQUIDITY AND CAPITAL RESOURCES

    The Company has financed its operations since inception almost entirely from
the sale of equity and debt securities, supplemented with a bank line of credit.
In December 1998, it completed its initial public offering of securities, in
which it sold an aggregate of 2,530,000 units consisting of Common Stock and
redeemable Common Stock Purchase Warrants (the "Units"), at an initial public
offering price of $6.50 per Unit. The offering netted the Company approximately
$14,052,000 after deducting expenses related to the offering. In January 1999,
the conditions for redemption set forth in the Common Stock Purchase Warrants
were satisfied, and the Company redeemed its outstanding public warrants as of
February 22, 1999. As a result, a total of approximately 1,269,000 warrants were
exercised, which resulted in gross proceeds to the Company of approximately
$12,374,000. The Company paid approximately $315,000 to holders of Warrants who
chose not to redeem during the 30-day redemption period. As of September 30,
1999, the Company had cash and cash equivalents of $16,747,000 and working
capital of $16,423,000. The Company currently is financing its daily operations
primarily through the application of the net proceeds from the IPO and its
subsequent warrant call.

    Prior to its IPO, Company issued subordinated convertible promissory notes
which bear interest at 8% to 10%, are convertible into Common Stock at rates
ranging from $3.00 to $14.39 per share and other non-convertible debt at rates
from 8% to 15%. During 1998, note holders converted $2,466,000 of debt and
accrued interest of $264,000, including debt converted at the close of the
Company's IPO, into 626,384 shares of Common Stock. The remaining debt is all
due on or before June 30, 2000.

    The Company believes that its current financial resources will be sufficient
to fund its operations for at least the next 12 months and that, during that
period, it will not be necessary for the Company to raise additional funds to
meet the expenditures required for operating its business. However, there can be
no assurance that presently unforeseen events may result in the Company
determining to raise additional funds.

                                       9
<PAGE>
    The Company will continue to make significant ongoing investments in
research and development for future generation products and services. It also
expects to have significant expenditures in sales and marketing and further
content acquisition in order to attract customers to its Web site. There is no
assurance that the Company's analysis of its capital requirements will be
accurate, particularly in light of the fact that has entered a new business in a
new market.

    The Company's future expenditures and capital requirements will depend on a
number of factors including the development and implementation of next
generation technologies, technological developments on the Internet and the
regulatory and competitive environment for Internet based products and services.

NET OPERATING LOSS CARRYFORWARDS

    At December 31, 1998, the Company fully provided against its deferred tax
assets. The Company believes sufficient uncertainty exists regarding the
realizability of the deferred tax assets such that a full valuation allowance is
required. At December 31, 1998, the Company had approximately $10,603,000 of
federal net operating loss carryforwards for tax reporting purposes available to
offset future taxable income; such carryforwards will expire beginning in 2009.
Additionally, the Company has approximately $5,301,000 of California net
operating loss carryforwards for tax reporting purposes which will expire
beginning in 1999.

    The Tax Reform Act of 1986 imposes limitations on the use of net operating
loss carryforwards if certain stock ownership changes have occurred or could
occur in the future. The sale of the Units sold in the Company's December 1998
IPO constituted such a change in ownership and utilization of the Company's net
operating loss carryforwards may be limited.

YEAR 2000 COMPLIANCE

    There are issues associated with the programming code in existing computer
systems as the Year 2000 approaches. The "Year 2000 problem" is pervasive and
complex, as virtually every computer operation will be affected in some way by
the rollover of the two digit year value to 00. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The Company has evaluated its current systems, purchased necessary
upgrades and believes that its current hardware and software is Year 2000
compliant. Similarly, the Company believes that the products and services it
offers to its customers are not affected by the Year 2000 problem. The Company
has evaluated the potential impact on it of a Year 2000 problem on the part of
its important third party vendors and has found none. The Company plans to
continue to evaluate its systems and those of its important vendors in an effort
to minimize the effects of a Year 2000 problem. The Company does not anticipate
that the Year 2000 problem will have a material impact on its business or
operations and has no contingency plan in place.

BUSINESS RISKS

    The future operating results of the Company are highly uncertain, and the
following factors should be carefully reviewed in addition to the other
information contained in this report on Form 10-QSB and in other public
disclosures of the Company.

                                       10
<PAGE>
    HISTORY OF LOSSES AND ANTICIPATION OF FUTURE LOSSES.  The Company was
incorporated in June 1994 to deliver free, personalized audio via the Internet
and was in the development stage until the fourth quarter of 1997. The Company
first recognized revenues in November 1997 and has recorded net losses each year
since its inception. At September 30, 1999 the Company had an accumulated
deficit of approximately $19,331,000. Accordingly, the Company has a limited
operating history on which to base an evaluation of its business and prospects.
The Company and its prospects must be considered in light of the early stage of
development, particularly companies in new and rapidly evolving markets such as
the market for Internet content, electronic commerce ("e-commerce") and
advertising. To achieve and sustain profitability, the Company must, among other
things, (i) provide diverse content of interest to Internet users,
(ii) effectively develop new and maintain existing relationships with
advertisers, advertising agencies and content providers, (iii) continue to
develop and upgrade its technology and network infrastructure; (iv) respond to
competitive developments, (v) successfully introduce enhancements to its
existing products and services to address new technology standards and
developments on the Internet, and (vi) attract, retain and motivate qualified
personnel. The Company's operating results are also dependent on factors outside
the control of the Company, such as the availability of desirable content. There
can be no assurance that the Company will be successful in addressing these
risks and the failure to do so would have a material adverse effect on the
Company's business, results of operations and financial condition. Additionally,
the limited operating history of the Company makes the prediction of future
operating results difficult or impossible, and there can be no assurance that
the Company's revenues will increase or even continue at their current level or
generate sufficient cash from operations in future periods. The Company expects
to continue to incur significant losses on a quarterly and annual basis for the
foreseeable future. For these and other reasons, there is no assurance that the
Company will ever achieve profitability or, if profitability is achieved, that
it can be sustained.

    LIMITED OPERATING HISTORY; UNPREDICTABILITY OF FUTURE REVENUES; POTENTIAL
FLUCTUATIONS IN QUARTERLY RESULTS. The Company has been out of the development
stage only since the fourth quarter of 1997. Because of the Company's limited
operating history and the emerging nature of the markets in which it competes,
the Company is unable to forecast accurately its revenues. Additionally, the
long-term acceptance of Web-based advertising and e-commerce is as yet
uncertain. The Company currently intends to continue to increase substantially
its operating expenses in order to, among other things, (i) expand its
distribution network capacity, (ii) fund increased sales and marketing
activities, (iii) acquire additional content, (iv) develop and upgrade
technology and (v) purchase equipment for its operations. The Company's expense
levels are based, in part, on its expectations with regard to future revenues,
and to a large extent such expenses are fixed, particularly in the short term.
To the extent the Company is unsuccessful in increasing its revenues, the
Company may be unable to appropriately adjust spending in a timely manner to
compensate for any unexpected revenue shortfall or will have to reduce its
operating expenses, causing it to forego potential revenue generating
activities, either of which could cause a material adverse effect in the
Company's business, results of operations and financial condition.

    The Company's quarterly operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside the
Company's control. Factors that may affect the Company's quarterly operating
results include (i) the cost of acquiring and the availability of content,
(ii) demand for Internet advertising, (iii) seasonal trends in advertising
placements, (iv) the advertising cycles for, or the addition or loss of,
individual advertisers, (v) the level of traffic on the Company's Web site,
(vi) the amount and timing of capital expenditures and other costs relating to
the expansion of the Company's operations, (vii) price competition or pricing
changes in Internet advertising, (viii) the level of and seasonal trends in the
use of the Internet, (ix) technical difficulties or system downtime, (x) the
introduction of new products or services by the Company or its competitors and
(xi) general economic conditions and economic conditions specific to the
Internet, such as electronic commerce and online media. Any one of these factors
could cause the Company's revenues and operating results to vary significantly
in the future. In addition, as a strategic response to changes in the
competitive environment, the Company may from

                                       11
<PAGE>
time to time make certain pricing, service or marketing decisions or
acquisitions that could cause significant declines in the Company's quarterly
operating results.

    DEPENDENCE ON CONTENT PROVIDERS; LICENSE FEES PAYABLE TO CONTENT
PROVIDERS.  The Company's future success depends in large part upon its ability
to obtain rights to and deliver content of sufficient interest to end users over
the Internet. The Company does not create its own content. Rather, the Company
relies on third party content providers, such as book publishers, news and
financial information services and music publishers for the content it makes
available to its subscribers. The Company's ability to maintain its existing
relationships with such content providers and to build new relationships with
additional content providers is critical to the success of its business.
Although many of the Company's agreements with third party content providers are
for an initial term of one year, with automatic renewal unless cancelled, the
content providers may choose to terminate such agreements prior to the
expiration of their terms. The Company's inability to secure licenses from
content providers or the termination of a significant number of content provider
agreements would decrease the availability of content that the Company can offer
users. This may result in decreased traffic on the Company's Web site and, as a
result, decreased advertising revenue, which could have a material adverse
effect on the Company's business, results of operations and financial condition.

    The Company's agreements with most of its content providers are
nonexclusive, and many of the Company's competitors offer, or could offer,
content that is similar to or the same as that obtained by the Company from such
nonexclusive content providers. Such direct competition could have a material
adverse effect on the Company's business, results of operations and financial
condition.

    License fees payable to content providers and other licensing agencies may
increase as the Company continues to accumulate content and as competition for
such content increases. There is no assurance that the Company's content
providers and other licensing agencies will enter into prospective agreements
with the Company on the same or similar terms as those currently in effect or on
terms acceptable to the Company if no agreement is in effect. If the Company is
required to pay increased licensing fees, such increased payments could have a
material adverse effect on the Company's business, results of operations and
financial condition.

    UNCERTAIN ACCEPTANCE OF THE INTERNET AS AN ADVERTISING MEDIUM.  The market
for Internet advertising is relatively new, is rapidly evolving and is
characterized by an increasing number of market entrants. As is typical in the
case of a new and rapidly evolving industry, demand and market acceptance for
recently introduced products and services are subject to a high level of
uncertainty. The Company's ability to generate advertising revenue will depend
on, among other factors, (i) the continued development of the Internet as an
advertising medium, (ii) pricing of advertising on other Web sites, (iii) the
amount of traffic on the Company's Web site, (iv) the Company's ability to
achieve and demonstrate user and member demographic characteristics that are
attractive to advertisers, (v) the development and expansion of the Company's
advertising sales force and (vi) the establishment and maintenance of desirable
advertising sales agency relationships. Most potential advertisers and their
advertising agencies have only limited experience with the Internet as an
advertising medium and have not historically devoted a significant portion of
their advertising expenditures to Web-based advertising. There is no assurance
that advertisers or advertising agencies will be persuaded to allocate or
continue to allocate portions of their budgets to Web-based advertising or, if
so persuaded, that they will find such advertising to be effective for promoting
their products and services relative to traditional print and broadcast media.
No standards have yet been widely accepted for the measurement of the
effectiveness of Web-based advertising, and there can be no assurance that such
standards will develop sufficiently to enable Web-based advertising to become a
significant advertising medium. Acceptance of the Internet among advertisers and
advertising agencies will also depend, to a large extent, on the level of use of
the Internet by consumers and upon growth in the commercial use of the Internet.
If widespread commercial use of the Internet does not develop, or if the
Internet does not develop as an effective and measurable medium for advertising,
the Company's business, results of operations and financial condition could be
materially adversely affected.

                                       12
<PAGE>
    MANAGEMENT OF GROWTH.  The Company anticipates that significant expansion of
its operations will be required in order to address potential market
opportunities. The Company expects that it will need to increase its personnel
significantly in the near future. The anticipated substantial growth is expected
to place a significant strain on its managerial, operational and financial
resources and systems. To manage its growth, the Company must implement, improve
and effectively use its operational, management, marketing and financial systems
and train and manage its employees. There can be no assurance that the Company
will be able to manage effectively the expansion of its operations or that the
Company's current personnel, systems, procedures and controls will be adequate
to support the Company's operations. Any failure of management to manage
effectively the Company's growth could have a material adverse effect on the
Company's business, results of operations and financial condition.

    RISK OF SYSTEM FAILURE, DELAYS AND INADEQUACY; SINGLE SITE.  The
performance, reliability and availability of the Company's Web site and network
infrastructure are critical to its reputation and ability to attract and retain
users, advertisers and content providers. The Company's network infrastructure
is located at a single, leased facility in Cupertino, California. The Company's
systems and operations are vulnerable to damage or interruption from fire,
flood, earthquakes, power loss, telecommunications failure, Internet breakdowns,
break-ins and similar events. The Company does not presently have redundant
facilities or systems or a formal disaster recovery plan and does not carry
sufficient business interruption insurance to compensate it for losses that may
occur. Services based on sophisticated software and computer systems often
encounter development delays and the underlying software may contain undetected
errors that could cause system failures when introduced. Any system error or
failure that causes interruption in availability of content or an increase in
response time could result in a loss of potential or existing business services
customers, users, advertisers or content providers and, if sustained or
repeated, could reduce the attractiveness of the Company's Web site to such
entities or individuals. In addition, because the Company's Web advertising
revenues are directly related to the number of advertisements delivered by the
Company to users, system interruptions that result in the unavailability of the
Company's Web site or slower response times for users would reduce the number of
advertisements delivered and reduce revenues.

    A sudden and significant increase in traffic on the Company's Web site could
strain the capacity of the software, hardware and telecommunications systems
deployed or used by the Company, which could lead to slower response times or
system failures. The Company's operations also are, in part, dependent upon
receipt of timely feeds from certain of its content providers, and any failure
or delay in the transmission or receipt of such feeds, whether due to system
failure of the Company, its content providers, satellites or otherwise, could
disrupt the Company's operations. The Company is also dependent upon Web
browsers, Internet Service Providers ("ISPs") and online service providers
("OSPs") to provide Internet users access to the Company's Web site. Users may
experience difficulties accessing or using the Company's Web site due to system
failures or delays unrelated to the Company's systems. These difficulties may
result in intermittent interruption in programming. Any sustained failure or
delay could reduce the attractiveness of the Company's Web site to users,
advertisers and content providers. The occurrence of any of the foregoing events
could have a material adverse effect on the Company's business, results of
operations and financial condition.

    SECURITY RISKS.  Despite the implementation of security measures, the
Company's networks may be vulnerable to unauthorized access, computer viruses
and other disruptive problems. A party who is able to circumvent security
measures could misappropriate proprietary information or cause interruptions in
the Company's Internet operations. ISPs and OSPs have in the past experienced,
and may in the future experience, interruptions in service as a result of the
accidental or intentional actions of Internet users, current and former
employees or others. The Company may be required to expend significant capital
or other resources to protect against the threat of security breaches or to
alleviate problems caused by such breaches. Although the Company intends to
continue to implement industry-standard security measures, there can be no
assurance that measures implemented by the Company will not be circumvented in
the

                                       13
<PAGE>
future. Eliminating computer viruses and alleviating other security problems may
require interruptions, delays or cessation of service to users accessing the
Company's Web sites, which could have a material adverse effect on the Company's
business, results of operations and financial condition.

    DEPENDENCE ON SHORT-TERM ADVERTISING CONTRACTS. A substantial portion of the
Company's Web advertising revenues are derived from short-term contracts.
Consequently, many of the Company's advertising customers can cease advertising
on the Company's Web site quickly and without penalty, thereby increasing the
Company's exposure to competitive pressures. There is no assurance that the
Company's current advertisers will continue to purchase advertisements or that
the Company will be able to secure new advertising contracts from existing or
future customers at attractive rates or at all. Any failure of the Company to
achieve sufficient advertising revenue could have a material adverse effect on
the Company's business, results of operations and financial condition.

    COMPETITION.  The market for e-commerce, information services and
entertainment on the Internet and otherwise is highly competitive, and the
Company expects that competition will continue to intensify. The Company
competes with (i) other Web sites and Internet broadcasters to acquire and
provide content to attract users, (ii) online services, other Web site operators
and advertising networks, as well as traditional media such as television, radio
and print, for a share of advertisers' total advertising budgets (iii) local
radio and television stations and national radio and television networks for
sales of advertising spots and (iv) other e-commerce enabled Web sites for
on-line customers. There is no assurance that the Company will be able to
compete successfully or that the competitive pressures faced by the Company,
including those described below, will not have a material adverse effect on the
Company's business, results of operations and financial condition.

    The Company also competes with online services, other Web site operators and
advertising networks, as well as traditional media such as television, radio and
print for a share of advertisers' total advertising budgets. The Company
believes that the principal competitive factors for attracting advertisers
include the number of users accessing the Company's Web site, the demographics
of the Company's users, the Company's ability to deliver focused advertising and
interactivity through its Web site and the overall cost-effectiveness and value
of advertising offered by the Company. There is intense competition for the sale
of advertising on high-traffic Web sites, which has resulted in a wide range of
rates quoted by different vendors for a variety of advertising services, making
it difficult to project levels of Internet advertising that will be realized
generally or by any specific company. Any competition for advertisers among
present and future Web sites, as well as competition with other traditional
media for advertising placements, could result in significant price competition.
The Company believes that the number of companies selling Web-based advertising
and the available inventory of advertising space have recently increased
substantially. Accordingly, the Company may face increased pricing pressure for
the sale of advertisements. Reduction in the Company's Web advertising revenues
would have a material adverse effect on the Company's business, results of
operations and financial condition.

    Many of the Company's competitors and potential competitors have greater
financial, sales and other resources than the Company. There is no assurance
that the Company's business strategy will be successful, or that the Company
will gain a market share or customer base that will be sufficient to justify
continued operations.

    PRODUCT DEVELOPMENT AND TECHNOLOGICAL OBSOLESCENCE.  The market for Internet
information delivery is characterized by extensive research and development and
rapid technological change, frequent new product introductions and technological
innovation, resulting in short product life cycles, and evolving industry
standards. Development by others of new or improved products, processes or
technology may render the Company's products and services less competitive or
obsolete. The emerging character of these products and services and their rapid
evolution will require the Company to effectively use leading technologies,
continue to develop its technological expertise, enhance its current services
and continue to improve the performance, features and reliability of its network
infrastructure. Changes in network

                                       14
<PAGE>
infrastructure, transmission and content delivery methods and underlying
software platforms and the emergence of new technologies could dramatically
change the structure and competitive dynamic of the market for the Company's
products and services. There is no assurance that the Company will be successful
in responding quickly, cost effectively and sufficiently to these or other such
developments. In addition, the widespread adoption of new Internet technologies
or standards could require substantial expenditures by the Company to modify or
adapt its Web site and services. A failure by the Company to rapidly respond to
technological developments could have a material adverse effect on the Company's
business, results of operations and financial condition.

    DEPENDENCE ON CONTINUED GROWTH IN USE OF THE INTERNET.  Rapid growth in the
use of and interest in the Internet is a recent phenomenon and there can be no
assurance that acceptance and use of the Internet will continue to develop or
that a sufficient base of users will emerge to support the Company's business.
Because global commerce and on-line exchange of information on the Internet is
new and evolving, it is difficult to predict with any assurance whether the
Internet will prove to be a viable commercial marketplace. Future revenues of
the Company will depend largely on the widespread acceptance and use of the
Internet as a source of multimedia information and entertainment and as a
vehicle for commerce in goods and services. The Internet may not be accepted as
a viable commercial medium for broadcasting multimedia content, if at all, for a
number of reasons, including (i) potentially inadequate development of the
necessary infrastructure, (ii) inadequate development of enabling technologies,
(iii) lack of acceptance of the Internet as a medium for distributing content
and (iv) inadequate commercial support for Web-based advertising. To the extent
that the Internet continues to experience an increase in users, an increase in
frequency of use or an increase in the bandwidth requirements of users, there
can be no assurance that the Internet infrastructure will be able to support the
demands placed upon it, specifically the demands of delivering high-quality
video content. Furthermore, user experiences on the Internet are affected by
access speed. There is no assurance that broadband access technologies and cable
modems will become widely adopted. In addition, the Internet could lose its
viability as a commercial medium due to delays in the development or adoption of
new standards and protocols required to handle increased levels of Internet
activity, or due to increased government regulation. Changes in or insufficient
availability of telecommunications services to support the Internet also could
result in unacceptable response times and could adversely affect use of the
Internet generally and of the Company's Web site in particular. If use of the
Internet does not continue to grow or grows more slowly than expected, or if the
Internet infrastructure does not effectively support the growth that may occur,
the Company's business, results of operations and financial condition could be
materially adversely affected.

    DEPENDENCE UPON KEY PERSONNEL.  The Company's success depends, to a
significant extent, upon a number of key employees and consultants. The loss of
the services of one or more of these employees or consultants could have a
material adverse effect on the business of the Company.

    GOVERNMENT REGULATION AND LEGAL UNCERTAINTY.  Although there are currently
few laws and regulations directly applicable to the Internet, it is likely that
new laws and regulations will be adopted in the United States and elsewhere
covering issues such as music licensing, broadcast license fees, copyrights,
privacy, pricing, sales taxes and characteristics and quality of Internet
services. The adoption of restrictive laws or regulations could slow Internet
growth or expose the Company to significant liabilities associated with content
available on its Web site. The application of existing laws and regulations
governing Internet issues such as property ownership, libel and personal privacy
is also subject to substantial uncertainty. There can be no assurance that
current or new laws and regulations, or the application of existing laws and
regulations (including laws and regulations governing issues such as property
ownership, content, taxation, defamation and personal injury), will not expose
the Company to significant liabilities, significantly slow Internet growth or
otherwise cause a material adverse effect on the Company's business, results of
operations or financial condition.

                                       15
<PAGE>
    The Company currently does not collect sales or other taxes with respect to
the sale of services or products in states and countries where the Company
believes it is not required to do so. Some states and countries have sought to
impose sales or other tax obligations on companies that engage in online
commerce within their jurisdictions. A successful assertion by one or more
states or countries that the Company should collect sales or other taxes on
products and services, or remit payment of sales or other taxes for prior
periods, could have a material adverse effect on the Company's business, results
of operations and financial condition.

    The Communications Decency Act of 1996 (the "CDA") was enacted in 1996.
Although those sections of the CDA that, among other things, proposed to impose
criminal penalties on anyone distributing "indecent" material to minors over the
Internet were held to be unconstitutional by the U.S. Supreme Court, there can
be no assurance that similar laws will not be proposed and adopted. Although the
Company does not currently distribute the types of materials that the CDA may
have deemed illegal, the nature of such similar legislation and the manner in
which it may be interpreted and enforced cannot be fully determined, and
legislation similar to the CDA could subject the Company to potential liability,
which in turn could have an adverse effect on the Company's business, financial
condition and results of operations. Such laws could also damage the growth of
the Internet generally and decrease the demand for the Company's products and
services, which could adversely affect the Company's business, results of
operations and financial condition.

    POTENTIAL LIABILITY FOR INTERNET CONTENT.  As a distributor of Internet
content, the Company faces potential liability for negligence, copyright,
patent, trademark, defamation, indecency and other claims based on the nature
and content of the materials that it makes available to Internet users. Such
claims have been brought, and sometimes successfully pressed, against Internet
content distributors. In addition, the Company could be exposed to liability
with respect to the content or unauthorized duplication or broadcast of content.
Although the Company maintains general liability insurance, the Company's
insurance may not cover potential claims of this type or may not be adequate to
indemnify the Company for all liability that may be imposed. In addition,
although the Company generally requires its content providers to indemnify the
Company for such liability, such indemnification may be inadequate. Any
imposition of liability that is not covered by insurance, is in excess of
insurance coverage or is not covered by an indemnification by a content provider
could have a material adverse effect on the Company's business, results of
operations and financial condition.

                                       16
<PAGE>
                           PART II--OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS.

           In August 1999, Spirit Partners, L.P. and Gaines Berland, Inc. filed
       suit against the Company in the Supreme Court of State of New York,
       seeking damages according to proof, punitive damages in the amount of
       $3,000,000, attorneys' fees, costs and equitable relief, based on
       allegations of breach of contract, negligent misrepresetnation, and
       deceptive trade practices relating to the Company's redemption of its
       publicly traded warrants during February 1999. The Company removed the
       case to United States District Court for the Southern District of New
       York. Due to the nature of litigation generally and because the lawsuit
       is at an early stage, the Company cannot estimate the total expense,
       possible damages or settlement value, if any, that may ultimately be
       incurred in connection with the suit. However, the Company believes the
       suit is wholly without merit, intends to vigorously oppose the suit and
       believes that this matter will not have a material adverse effect on the
       Company's results of operations or financial condition.

ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS.

           In December 1998, the Company completed its initial public offering
       of securities, in which it sold an aggregate of 2,530,000 units
       consisting of Common Stock and redeemable Common Stock Purchase Warrants
       (the "Units"), at an initial public offering price of $6.50 per Unit. The
       offering netted the Company approximately $14,052,000 after deducting
       expenses related to the offering. In January 1999, the conditions for
       redemption set forth in the Common Stock Purchase Warrants were satisfied
       and the Company redeemed its outstanding public warrants as of
       February 22, 1999. As a result, a total of approximately 1,269,000
       warrants were exercised, which resulted in additional gross proceeds to
       the Company of approximately $12,374,000. The Company paid approximately
       $315,000 to holders of Warrants who chose not to redeem during the 30-day
       redemption period. Through September 30, 1999, approximately $4,910,000
       of the proceeds have been used in sales and administration and
       approximately $2,780,000 have been used in operating and development. The
       Company has also used approximately $1,419,000 of the net proceeds to
       repay debt, approximately $528,000 to acquire capital assets and $200,000
       to acquire Mass Music, Inc.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES.

           None.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

           None.

ITEM 5.    OTHER INFORMATION.

           None.

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

       a.  Exhibits

           27.1    Financial Data Schedule

       b.  Reports on Form 8-K during the quarter ended September 30, 1999

           During the period covered by this report, the Company did not file
           any reports on Form 8-K.

                                       17
<PAGE>
AUDIOHIGHWAY.COM

                                   SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

<TABLE>
<S>                                                    <C>  <C>
                                                       AUDIOHIGHWAY.COM

                                                       By:            /s/ NATHAN M. SCHULHOF
                                                            -----------------------------------------
                                                                        Nathan M. Schulhof
DATE: NOVEMBER 15, 1999                                              CHIEF EXECUTIVE OFFICER

                                                       By:               /s/ GREG SUTYAK
                                                            -----------------------------------------
                                                                           Greg Sutyak
                                                                     CHIEF FINANCIAL OFFICER
</TABLE>

                                       18
<PAGE>
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
       EXHIBIT
         NO.            DESCRIPTION
---------------------   -----------
<C>                     <S>
        27.1            Financial Data Schedule
</TABLE>

                                       19